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An Analysis of Allowance Banking in the EU ETS

Author

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  • Zaklan, Aleksandar
  • Ellerman, Denny
  • Valero, Vanessa
Abstract
The existence of some 2 billion unused EU Allowances (EUAs) at the end of Phase II of the EU s Emissions Trading System (EU ETS) has sparked considerable debate about structural shortcomings of the EU ETS. However, there has been a surprising lack of interest in considering the accumulation of EUAs in light of the theory of intertemporal permit trading, i.e. allowance banking. In this paper we adapt basic banking theory to the case of a linearly declining cap, as is common in greenhouse gas control systems. We show that it is perfectly rational for agents to decrease emissions beyond the constraint imposed by the cap initially, accumulating an allowance bank and then drawing it down in the interest of minimizing abatement cost over time. Having laid out the theory, we carry out a set of simulations for a reasonable range of key parameters, geared to the EU ETS, to illustrate the effects of intertemporal optimization of abatement decisions on optimal time paths of emissions and allowance prices. We conclude that bank accumulation as the result of intertemporal abatement cost optimization should be considered at least a partial explanation when evaluating the current discrepancy between the cap and observed emissions.

Suggested Citation

  • Zaklan, Aleksandar & Ellerman, Denny & Valero, Vanessa, 2015. "An Analysis of Allowance Banking in the EU ETS," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113034, Verein für Socialpolitik / German Economic Association.
    • Handle: RePEc:zbw:vfsc15:113034
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Anouk Faure & Marc Baudry, 2021. "Technological Progress and Carbon Price Formation: an Analysis of EU-ETS Plants," Working Papers hal-04159764, HAL.
    2. Perino, Grischa & Willner, Maximilian, 2016. "Procrastinating reform: The impact of the market stability reserve on the EU ETS," Journal of Environmental Economics and Management, Elsevier, vol. 80(C), pages 37-52.
    3. Delarue, Erik & Van den Bergh, Kenneth, 2016. "Carbon mitigation in the electric power sector under cap-and-trade and renewables policies," Energy Policy, Elsevier, vol. 92(C), pages 34-44.
    4. Quemin, Simon & Trotignon, Raphaël, 2021. "Emissions trading with rolling horizons," Journal of Economic Dynamics and Control, Elsevier, vol. 125(C).
    5. Jan Abrell & Sebastian Rausch & Hidemichi Yonezawa, 2019. "Higher Price, Lower Costs? Minimum Prices in the EU Emissions Trading Scheme," Scandinavian Journal of Economics, Wiley Blackwell, vol. 121(2), pages 446-481, April.
    6. Stefan Trück & Rafał Weron, 2016. "Convenience Yields and Risk Premiums in the EU‐ETS—Evidence from the Kyoto Commitment Period," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 36(6), pages 587-611, June.
    7. Xu, Jia & Tan, Xiujie & He, Gang & Liu, Yu, 2019. "Disentangling the drivers of carbon prices in China's ETS pilots — An EEMD approach," Technological Forecasting and Social Change, Elsevier, vol. 139(C), pages 1-9.
    8. Kollenberg, Sascha & Taschini, Luca, 2019. "Dynamic supply adjustment and banking under uncertainty in an emission trading scheme: The market stability reserve," European Economic Review, Elsevier, vol. 118(C), pages 213-226.
    9. Simon Quemin & Raphael Trotignon, 2018. "Competitive Permit Storage and Market Design: An Application to the EU-ETS," Working Papers 2018.19, FAERE - French Association of Environmental and Resource Economists.
    10. Perino, Grischa & Willner, Maximilian, 2015. "The price and emission effects of a market stability reserve in a competitive allowance market," WiSo-HH Working Paper Series 28, University of Hamburg, Faculty of Business, Economics and Social Sciences, WISO Research Laboratory.
    11. Corjan Brink & Herman R.J. Vollebergh, 2020. "What Can We Learn from EU ETS?," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 18(01), pages 23-29, April.
    12. Abrell, Jan & Rausch, Sebastian, 2017. "Combining price and quantity controls under partitioned environmental regulation," Journal of Public Economics, Elsevier, vol. 145(C), pages 226-242.
    13. Kollenberg, Sascha & Taschini, Luca, 2016. "Emissions trading systems with cap adjustments," Journal of Environmental Economics and Management, Elsevier, vol. 80(C), pages 20-36.
    14. Yolanda Fernández Fernández & María Angeles Fernández López & David González Hernández & Blanca Olmedillas Blanco, 2018. "Institutional Change and Environment: Lessons from the European Emission Trading System," Energies, MDPI, vol. 11(4), pages 1-16, March.
    15. Joltreau, Eugénie & Sommerfeld, Katrin, 2016. "Why does emissions trading under the EU ETS not affect firms' competitiveness? Empirical findings from the literature," ZEW Discussion Papers 16-062, ZEW - Leibniz Centre for European Economic Research.
    16. Carlén, Björn & Dahlqvist, Anna & Mandell, Svante & Marklund, Pelle, 2019. "EU ETS emissions under the cancellation mechanism - Effects of national measures," Energy Policy, Elsevier, vol. 129(C), pages 816-825.
    17. Kim Collins & Roman Mendelevitch, 2015. "Leaving Coal Unburned: Options for Demand-Side and Supply-Side Policies," DIW Roundup: Politik im Fokus 87, DIW Berlin, German Institute for Economic Research.
    18. Clemens Gerbaulet & Casimir Lorenz, 2017. "dynELMOD: A Dynamic Investment and Dispatch Model for the Future European Electricity Market," Data Documentation 88, DIW Berlin, German Institute for Economic Research.

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    JEL classification:

    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • F18 - International Economics - - Trade - - - Trade and Environment

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